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Ahead of Wall Street - Jan 17, 2013 - Ahead of Wall Street

Strong housing and labor market readings this morning should add
to optimism about the overall economic picture and offset the
weak earnings reports from
Bank of America
(
BAC
) and
Citigroup
(
C
). While the debt ceiling issue remains an overhang for this
market, today's better-than-expected Housing Starts and Jobless
Claims data should help add to optimism.

It is perhaps to reasonable to take the amazing drop in initial
Jobless Claims this week with a pinch of salt, but the drop is
nevertheless welcome. Initial Jobless Claims dropped a much
bigger than expected 37K this week to 335K, the lowest level
since early 2008. Seasonal variations most likely are at work in
this week's drop as the claims data typically jumps in the
initial weeks of January. The four-week average, which is
relatively less volatile, dropped to 359.3K from 366K the month
before.

But even if one has some doubts about this morning's claims data,
there are no questions about the positive tone of the December
Housing Starts numbers, even though the numbers are seasonally
adjusted. Housing Starts increased to the seasonally adjusted
annual rate of 954K in December relative to expectations of 890K
and November's 851K (revised down from the originally reported
861K level).

The December Starts level is up 37% from the same period last and
is the highest level since June 2008. This data provides further
confirmation of the broad improving trend in the home
construction sector, which could potentially offset weakness from
the export side and keep overall economic growth stable.
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The strength was broad-based, both in terms of regions as well
as structure type. Starts increased 24.7% in the Midwest, 21.4%
in the Northeast, 18.7% in the West and 3.8% in the South. In
terms of structure type, single-family home starts increased
8.1%, while gains on the multi-family front were 20.3%.

Unlike Starts, the gains on the Permits front were roughly
in-line with expectations. Building Permits increased 1.3% in
December, with single-family permits up 1.8% and multi-family
permits up 2.1%.

Gains in the homebuilder sentiment index, a leading indicator of
home construction, in recent months confirms the positive
momentum on the home construction front that we have been hearing
from homebuilders like
Lennar
(
LEN
),
Pulte Homes
(
PHM
) and others. While the January homebuilder sentiment index
released yesterday didn't change from the month before, its 2012
gain has been one of the highest on record.

Based on the historical correlation between the index and housing
starts, some analysts estimate that the index's current level is
consistent with housing starts that are almost double the current
pace. This would mean that housing starts could continue to
improve even if the index doesn't show much improvement in the
coming days. Bottom line, housing could potentially be a bigger
contributor to GDP growth this year than has been the case in
recent quarters, offsetting slack from the external sector.

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